Sunday, November 23, 2008

Seeing the Whole Elephant

Shyam Ponappa / New Delhi November 23, 2008

While the world scrambles to prevent chaos, we seem to be moving in a dream...

The accompanying graphic has six opinions on how to assure growth, from economists and industry association heads at the India Economic Summit 2008, sponsored by the World Economic Forum and the CII.

These views give some idea of how much dissonance there is on what should be done for growth. Five of the six agree on investment in infrastructure (the top row). Thereafter, only two-at-a-time agree, on (a) regulations without stifling markets, (b) stimulating consumption: one through tax cuts, another through rate cuts, and (c) incentives to banks to lend.
Is infrastructure spending a good solution? Consider the evidence: our problem from even before the economic crisis was not funding for infrastructure, but inability to get projects implemented. For instance, there are the highway projects that started off well enough, then slowed over the last couple of years. In the last few months, many have been given up by our top constructors. A report in this newspaper attributes this to unrealistic project estimates and/or high interest costs.* Other instances are the steel and aluminium projects stalled because of land acquisition policies and practices. Therefore, efforts to spend on such projects are likely to have little immediate effect until the structural problems in their award and execution are resolved. What it will do is help anchor better expectations — one peg to raising confidence — because it will signal better developments for the future. But we have to survive the present in good enough shape to be able to enjoy the future…
In such circumstances, one would expect a certain alignment between the opinions of the industry chambers and of bankers, but this coherence is missing. Is this getting lost in the cacophony of a typical Indian dialogue-of-the-deaf, where everyone talks while no one listens, so there is no discernable common thread, let alone harmony and symphony?
However, three of the six opinions do address the immediate crisis of profits, revenues, and of continuing investment and consumer spending, the necessary ingredients to keep growth on track. This is what needs attention: the logic and urgency of time lines — what needs doing now, to keep from falling over the cliff.
From the perspective of a time line, let us distinguish between what can be done quickly for immediate effect in this crisis, as against what can be done for the medium- and longer term. First on our list, most likely, would be rate cuts, because of the impact and ease of execution. These would be in the SLR and CRR to provide a massive psychological cushion of liquidity, and in the repo and reverse-repo rates to bring down the tide of interest costs. Combined with the announcement of a redefined ‘priority sector lending’ which would include rollovers of loans except where there is demonstrated bad-faith, and a system (to be developed and introduced in the near-to-medium term) of online monitoring for compliance, with incentives and penalties. This would lead to credit availability for projects and businesses, now made profitable by the repricing of funds and projects. Real estate and property development, however, will need rescheduling with major asset re-pricing.
In terms of urgency, these would be the first steps to alleviate the situation immediately. Followed by steps to rationalise taxes, e.g., on petroleum products (Kelkar Committee recommendations). The objective: to reduce input costs and multiplier effects on the overall cost structure. Keep our steel mills, automotive companies and airlines running, our airports building… What this would achieve is continuing domestic-demand-driven growth, encouraging reasonable levels of consumption, and retaining employment. As for government revenues, the logic of profit-sharing, so clearly understood for petroleum exploration and some aspects of telecommunications after NTP ’99, would ensure that government makes much more from fat geese that lay many golden eggs, than from strangulating the few that are presently scratching about to eke out a living.
If this is not done, in all likelihood we will have escalating bankruptcies of capital-intensive enterprises, which, because of increasing repossessions and collapsing prices, may lead to a risk we have been spared so far: bank failures. If these events occur, the likely consequence is a severe recession in India as well — not for six months, but for many years — because both investment and spending will dry up, as will growth. And the great benefit of having become an attractive investment destination will, instead, become a frightful return to the uncertainties of pre-2003.
Those inclined to see a glass always half-full would say (next year and the next): But growth is 4-6 per cent in catastrophic global times. The rest of us will see it as running at half-speed, with all the attendant consequences for a talented people, once again held down by our collective inability to work things out for the common good.

* ‘Few takers for highway projects’, BS November 17, 2008:

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